USD/JPY continues to trade higher with the Bank of Japan (BOJ) revising growth and inflation forecasts lower and keeping interest rates unchanged as expected. The central bank maintained the policy balance rate at -0.1% and retained the 10-year Japanese government bond yield target at about 0%, but downgraded the consumer price index (CPI) inflation forecast for the current fiscal year (April 2020 to March 2021) to -0.6% from -0.5%.
And the bank sees inflation rising to 0.4% in the next fiscal year compared to the previous estimate of 0.3%. And Japan’s gross domestic product (GDP) contracted by 5.5% in the current fiscal year versus the previous forecast of -4.7% and upgraded growth forecast for the next fiscal to 3.6% from 3.3%.
BOJ is set to maintain its massive stimulus programme on Thursday and vow to take further action if the economic fallout from the corona virus shock threatens a return to deflation. But the rising cost of prolonged easing and a dearth of policy tools may mean there is not much the BOJ can do beyond rolling over its crisis-response package or count on the government to unveil another spending package to re-ignite growth, analysts say.
Given the need to keep in place some restraints to economic activity to prevent the spread of the virus, the BOJ is not in a position now to push prices higher with further easing, said Naoya Oshikubo, senior economist at SuMi TRUST. He also said, “As a result, the key policy drivers under Prime Minister (Yoshihide) Suga will be fiscal policy, deregulation and growth strategies, leaving monetary policy on the sidelines.”
In a quarterly review of its projections, the BOJ is seen cutting this year’s growth and price forecasts as the pandemic hits domestic demand, sources told.
USD/JPY 4 Hour Chart:
Support: 104.10 (S1), 103.88 (S2), 103.66 (S3).
Resistance: 104.54 (R1), 104.77 (R2), 104.99 (R3).
In the prevailing environment creating pressure for yen in the downgraded growth prospects by BOJ, we expect a bullish trend for USD/JPY.
